Thursday, 19 January 2017

Developers are sitting on an unheard of 42,591 approvals

No data release seems to create quite as much confusion as the building activity figures.

Construction work in the residential sector is always apparently either booming or crashing, depending on who you believe, or commonly it's both.

Still, where there is discord may we bring harmony, by breaking it all down into three simple parts, starting with...

Part 1 - Commencements ease back

Commencements fell again by 2.8 per cent to 55,070 in the September 2016 quarter, following a 7.2 per cent decline in the June quarter.

Dwelling starts fell in most states, even in New South Wales where the appetite for building is strongest, although the 'trend' figures still show NSW arcing higher.

Following on from sharp falls in unit and apartment approvals, it's no surprise that it was declines in this sector which have led the fall in commencements, particularly in Melbourne.

This in part represents nervous developers backing away from flooding the apartment markets further, as well as a failure to secure pre-sales in some cases.

Part 2 - Completions

Despite the huge boom in building work done over recent times, completions still hadn't run too high by the end of September, with 51,070 completions in the quarter, split between 27,773 houses and 22,666 units.

The main reason for this is simply that it takes considerably longer to build a block of apartments than it does a detached house.

Despite this, apartment completions are starting to flow through in the most populous states, particularly in New South Wales and Queensland, although Victoria dropped back in the quarter as some developers reportedly moved into a "go slow" mode.

Part 3 - The pipeline

The most important thing to note from this release is that although the appetite for commencing new developments has cooled substantially, there were still more than 221,000 dwellings under construction as at the end of Q3 2016, including more than 150,000 units, townhouses, and apartments.

Although some small inroads had been made into the apartment construction pipeline, the bulk of multi-unit project completions had yet to hit the market.

Given the sheer scale of the pipeline, perhaps it shouldn't be a surprise than an unprecedented number of approvals have not yet seen a shovel lifted in anger, with 42,591 approvals sitting in housing market Limboland.

Of course, there will always be some approvals waiting in this phase, yet 42,500 is just way, way above the historic norm. These are not normal times!

The wrap

Overall, the market does seem to be correcting itself gradually with developers pulling back on new project commencements, and slowing the rate of completions in some cases to allow capital city population growth to play catch up.

What the figures do show is that the full impact of the high rise boom had barely even begun to take shape by September 2016, so watch out for weakening apartment rents and and prices as 2017 rolls on.

The value of residential work done in Q3 declined, contributing to an awful negative GDP print for the quarter, and the sector is likely to become a headwind for the economy as the year progresses.